Strategic Sourcing Best Practices for Effective Procurement

Strategic Sourcing Best Practices Module 12 1

Overview Clarify the strategic sourcing process. Learn various steps typically utilized to strategically source a product or service. Know when strategic sourcing is a good idea and what to address. 2

Learner Outcomes Students will: Identify the guidelines when using a complex baseline assessment. Recall that standardization is a savings lever. Differentiate the most appropriate evaluation method for small purchases and complex purchases. 3

Strategic Sourcing Formalizes the way information is gathered. Price-based approach. Leverages purchasing power. Utilizes negotiations. Identifies the best possible value. Continuously improves and re-evaluates purchasing activities. 4

Strategic Sourcing (Cont.) Strategic sourcing requires analysis of what an organization buys, from whom, at what price and at what volume. Strategic sourcing differs from conventional purchasing because it places emphasis on the entire life-cycle of a product, not just its initial purchase price. 5

Things to Consider How much do we currently purchase? Leverage. What do we currently pay? Baseline. Buying several varieties of the same thing? Standardization. What is available? Market analysis. 6

Things to Consider (Cont.) Who can provide? Increased competition. What are our users needs? End user interviews. What will be our strategy? Solicitation approach. Are we getting what we expected? Contract management. 7

Recap Leverage. Baseline. Standardization. Market analysis. Increased competition. End user interviews. Solicitation approach. Contract management. 8

Opportunity Assessment Spend analysis. End user interviews. Prioritize categories. Build baseline. Identify savings levers. 9

Process of Spend Analysis Gather Spend Data AP reports. Other entity usage. P-card data. Invoices. Supplier reporting. System metrics. 10

Process of Spend Analysis (Cont.) Cleanse Data Duplicated suppliers. Miscoded categories. Evaluate and Prioritize Where is our biggest spend? Do we have a contract? What is the complexity of the acquisition? What is market timing? 11

End User Interviews What to Consider Who are your end users/internal customers? Do different users/internal customers have different needs? What is most important and primary objective(s) to each user/internal customer? What are needs vs. wants? Have recent acquisitions met your needs? Are there opportunities for standardization? What are the delivery requirements? 12

Prioritize Categories What is the annual spend by category (example- product or service)? Is category currently under contract? Are there timing considerations? Competing major solicitations? Market considerations? What is the complexity of the category? Would smaller spend but less complex categories yield quicker savings? 13

Build a Baseline Baseline is documentation established from historical purchases: What did we purchase? How much did we purchase? How much did we spend? Are there maintenance expenses? Are you going to inventory items or do Just in Time (JIT-ordered just as they are needed) orders? Baseline can be very limited and include only cost and quality characteristics. Baseline can be very complex, comprised of a market basket of items or services. 14

Build a Baseline (Cont.) How much is current product? Purchased Brand X laptops in 2015 for $ 1,200 each. Purchased a total of 100 laptops in 2015. Total spent in laptops in 2015 = $ 120,000. If we are to know how we have progressed, we must first know where we are. BASELINE!! 15

Complex Baseline Assessments Guidelines Market Basket is a group of fixed products or services in a specific market. Utilize the 80/20 rule. Utilizing the 80/20 rule means when analyzing the end user needs, take into consideration the percentage of products or services available which meet the end user needs versus the percentage of products or services available as a whole. Weighted items are based on volume of spend. Do not use bottom line sum; being concerned only with cost and profits. 16

Baseline Examples Not weighted market basket bottom line sum example (not strategically sourced): Item Vendor A Vendor B $ 209.00 $ 31.00 $ 4.00 $ 4.00 $ 248.00 Printer Drum Printer Toner Printer Head Cleaner TOTAL $ 199.00 $ 39.00 $ $ $ 245.50 6.00 1.50 Winner is Vendor A by $2.50. 17

Baseline Examples Same Bid Weighted market basket item baseline example (strategically sourced): Item Volume 20,000 $ 199.00 142,000 $ 39.00 13,000 $ 6.00 18,500 $ 1.50 Vendor A Vendor B $ 209.00 $ 31.00 $ 4.00 $ 4.00 $ 248.00 Printer Drum Printer Toner Printer Head Cleaner TOTAL Weighted Total $ 3,980,000 $ 5,538,000 $ 78,000 $ 27,750 $ 4,180,000 $ 4,402,000 $ 52,000 $ 74,000 $ 245.50 $ 9,623,750 $ 8,708,000 Winner is Vendor B by $915,750!! Volume multiplied by price = Weighted Market Basket Item Baseline ($20,000 x $199 = $3,980,000) 18

Identify Savings Levers Volume. Location Domestic or international. Scope More favorable pricing for a broader scope. Level of Service/Quality. Maintenance options. Standardization/Consolidation. Payment terms. Firm price or tied to index. Delivery frequency. Emergency response. Availability. Freight. Cost is associated with many things other than price. 19

Leverage How much volume do we currently purchase? One unit @ $1,000 each Ten units @ ?????? each 20

Standardization Are we buying several varieties of the same thing? Will two, rather than 10, models serve your customer needs? Are products over-specified? Can we utilize off the shelf products? Standardization is a savings lever. 21

Market Analysis What market information is available for the purchasing officer to evaluate? What are the latest products being offered? What have other states paid for the same product? Are there reviews of products available? Which suppliers control market? Is an index for primary commodity available? Note: Index for primary commodity refers to whether an index already exist for the primary products or services that can be accessed and utilized in the market analysis. This index may include comparable products or services, demographics for the market, etc. 22

Research Indexes Available for the Purchasing Officer Producer Price Index (PPI) commodities http://www.bls.gov/ppi/ Bureau of Labor Statistics http://www.crbtrader.com/ Commodity Research Bureau Vehicles http://www.edmunds.com/ http://www.kbb.com/ Kelley Blue Book Companies http://www.greenbook.org/ http://hoovers.com/free/tools/bcl/ 23

Increased Competition Who can provide the item/service you are looking for? Which suppliers are registered for the commodity? Are other suppliers available? Do your end users have suggested suppliers? Have you included related category codes when searching the registered vendor lists? 24

Solicitation Development What will be our strategy? Will this be a single award? Will multiple suppliers be needed for coverage? Do we have internal expertise? Should this be strategically sourced? Do we intend to negotiate? What evaluation method will we use? Price analysis (simple purchases). Value analysis (more complex total cost of ownership). When is best time to solicit the opportunity? 25

Contract Management Are we getting what we expected? Are customers pleased with product or service? Are established milestones being met? Are prices consistent with submitted bid? Is quality delivered as promised? Are delivery requirements being met? Is supplier reporting performance? Monitor your contract progress! 26

CONTINUE TO MODULE 13 CONTINUE TO MODULE 13 27